No Federal Bailouts for State and Local Government Pension Problems

There is bad news and worse news for state governments faced with underfunded pension promises. First, a new academic study shows that not only is the total gap between the pensions that state governments have promised to pay their employees and the available resources much larger than previous estimates, but that gap cannot be closed with easy changes to those promises.

Using the usual method of calculating the cost of pension promises, the study estimates that 116 major pension plans sponsored by the 50 states have assets of about $1.8 trillion to pay pension promises of between $3.6 trillion and $5.2 trillion. This leaves a gap of between $1.8 trillion and $3.4 trillion.

Unfortunately, fixing this problem won’t be easy. Increasing the retirement age by a year would reduce pension promises by only 2–4 percent; keeping future cost-of-living adjustments (COLAs) 1 percent below the actual increase in cost of living would reduce those promises by only 9 to 11 percent. Even uniformly increasing the retirement age to 74, eliminating COLAs altogether, or similar moves still leaves a total deficit of over $1 trillion.

To make matters worse, solving the problem will be even harder because nine states have constitutional provisions that appear to prohibit those states from reducing pension promises, while other states’ ability to change state and local pension promises are limited by a history of court cases. Thus, while Colorado, Minnesota, and South Dakota limited COLAs earlier this year, all three states have been sued by state employees and retirees seeking to block those reductions.

Not all state and local pension plans are in trouble. Many are properly funded and conservatively managed, but among those that are in the most trouble, the situation is becoming dire. For instance, at least five statewide Illinois pension plans have had to sell off about 10 percent of fund assets in order to pay benefits after the state government failed to make its full contributions to the plans.

The size of the underfunding combined with the complexity of reducing benefits will inevitably result in calls for a federal bailout, perhaps combined by an override of state constitutional language limiting the restructuring of pension promises or other federal involvement. Congress has voided parts of state constitutions in the past.

A federal bailout would be the worst possible outcome—even if it were accompanied by reform measures. Taxpayers in states or cities that have been responsible should not see their tax dollars used to relieve those states that have been irresponsible. States and local governments must resolve their own problems, or many will simply make cosmetic changes and then come back for another federal solution when things deteriorate again. Real change will happen only when they are forced to confront the full consequences of their past actions.

David John is one of five experts who "exert more influence" on the Social Security debate than anyone else in Washington – and he is The Heritage Foundation's lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security reform.

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They're government officials, public workers. They work for the people. When they're done, they're done. Why are they getting a pension, anyway? Especially when they work against the people. They can start a 401k like everyone else! If every private, free market business owner could afford to give each of their employees a pension, would show proof of good job performance in governing. These government members deserve less the LEAST the private sector makes. That'll tell us if they're working for the people, the American way or not!

NO MORE BAILOUTS – THEY JUST ENCOURAGE A TOTAL LACK OF RESPONSIBILITY. STATES MUST GET REALISTIC AND OFFER ONLY BENEFITS THAT ARE AFFORDABLE AND CAN BE FULLY FUNDED. THE FREE RIDE GOVERNMENT BAILOUT MENTALITY MUST STOP BEFORE WE GO TOTALLY BROKE.

Where can I find out where the California and Washington state pension plans stand in regard to solvency and their ability to fund the promised pensions for their state employees? I am a 72 computer novice and could find no links in your article regarding these two states.

Yes, Barry Soetoro, aka; Barak Obama is a bad puppet and yes, we need to get him out of office!

Be aware, via the two party paradyne and and an unlimited supply of your tax dollars, now owned by the Parasite Globalists’ that money can be used to promote many more of their puppets in waiting, now standing in the wings – while preparing to be launched upon the American citizens, should you be enticed to choose the wrong choices yet a second time!

You shall know them by their fruits:The reason we must vote out Establishment Government Representatives, whether they are Left or Right, Incumbent or Candidate is explained on this 2 minute News Clip below:

What has to be done will not be pleasant but it will be neccessary. If the states cannot afford a pension plan then they must get rid of it. They just need to figure out the best way to do it. One way is to stop pension on all people under 40 years of age while fulfilling the old retiree plan. If this is not possible then they must cut even more. Let people be responsible for investing their money and making their own retirement fund.

Those legislators that mismanage these pension funds should have all their assets confiscated and sold. It is way past time for the professional political establishment to stop sucking the wealth of everyone else and start pulling their own weight.

I wholeheartedly agree with this article. This is the same issue as that which created such problems for the major automobile companies. In order to lower their contributions (and thus make their quarterly earnings reports look better), they simply increased the assumed rate of return on the invested assets. This worked great until it became evident that such higher return was not being earned, and hence, a higher contribution would need to be made to make up for what they didn't contribute before. Instead of making that higher contribution, however, they simply added footnotes to their balance sheets for the "unfunded" liability represented by the pension promises for which there was insufficient assets in the plan to pay. This problem was known for decades but was simply ignored by management (and government) until it became such a huge portion of their debt that it could no longer be avoided and was a major factor in their bankruptcies (or near bankruptcy). At this point, they came begging to the government for a bailout, and unfortunately, we had an administration which refused to allow the chips to fall. As a result, the nation now has billions of dollars invested in car companies which it is not likely to ever have repaid. This same situation has been allowed to develop in state sponsored pension programs. Instead of standing firm and insisting that their plans be properly funded, they have acceded to the demands of unions and other pressure groups interested only in what could be gained for themselves with no respect for the long-term consequences or for reality. Now, they come with their hats in their hands pleading, "We didn't know" and begging for a bailout. They did know; they chose to play fast and loose thinking it would never catch up to them. If the government now bails them out, they were right– it didn't catch up to them. But it will have caught up to the rest of us who will have to pay additional taxes to pull their butts out of the fire. That means that as a taxpayer in a conservative state, I will be required to help pay the pensions of those who allowed their government officials to administer their plans in a liberal, irresponsible manner. I do not wish to be the safety net for high fliers who wish to take advantage of the rest of society. Let them fall on their faces, and let the people they represent suffer for having allowed them to play their liberal and / or corrupt games to start with.

1. Governments must Accept failure. People responsible for authoring these deals should be thrown in jail for fraud. These people have done far worse for the public employees than Madoff did for the rich. Public employees were conned. That is the short of it. Public and Union officials responsible for this fraud shoudl be found as guilty- if not guiltier than Madoff and the Enron leadership.

2. Void out all pension contracts regarding regarding matching funds. Since ther is no way to pay this back we should just be honest with everyone. It would hurt the economy far worse trying to meet these plans than it would to be to abandon them.

3. Develop a principal payback system that also includes a nominal insterst. People regardless of the fraud should have the right to their principal back. Also the government – after collecting fines from the criminal activities of the federal and state employee and union officials who authored these deals – shoudl pay an interest on the collected cash.

4. The employee takes that amount and invests it the way he or she see's fit.

5. The public should stop blindly trusting any government body. They ALL have proven to be untrustworthy and are as subjected to criminal behavior as the business they so call want to regulate. Governemnts should be taken out of the benefits business as they cannot be trusted with that. Employee benefits should be managed by the employee and should be portable. Governments can pay a portion of those benefits to the private company the employee uses for their benefits management. But governments should never be allowed to collect another dollar from their employees.

Once governments are seen to be as suseptable to corruption and criminality as private companies, we will no longer have this kind of fraud imposed on us again.

The various states have merely taken the lead from their counterparts in the federal government ,by not letting a lack of funds get in the way of making more promises. When it comes to funding government salaries, benefits and pensions, do you really believe that politicians are going to say "we can't afford it"? If you do, there is no sense for you to read any further.

Here in Illinois, our state politicians have never had a problem increasing the size of government, or of mortgaging the future of the state or its citizens by constantly borrowing money to pay for one state funded project after another and ever increasing salaries, benefits and pensions for all public employees. By law, Illinois has to have a "balanced budget", which is a bad joke because they continually borrow money, which they claim as assets instead of liabilities. By law, Illinois is required to make regular payments into state pension plans. Illinois constantly breaks the law by not making the required contributions into these pension plans and no one, from the Governor to the Attorney General to the State Supreme Court does anything about it.

Our former convicted Governor, George Ryan, (the one before convicted Governor Rod Blagojevich, spent billions of borrowed money on state construction projects he called "Illinois First". The fact that there was no money to finance these construction projects was of no consequence to him. HIs attitude was "sell bonds, let posterity figure out a way to pay them off". I'm sure that Illinois is not the only state where major metropolitan highways (even those in good shape) are rountinely torn up and rebuilt and resurfaced every year for the past 40 or 50 years. This constant need to tear up roads every year seems a bit strange, well maybe not so strange when you find out that one of the state's largest contributors to political campaigns is the Illinois Asphault Dealers Assn.

We now have a strong contingent of Illinois politicians in Washington D.C. including Barack Obama, Dick Durbin, Roland Burris, Rahm Emanuel, Valerie Jarrett and Arne Duncan and many Congressmen from the Chicago. These folks learned about economics, budgeting and finance in the cradle of fiscal responsibility, Chicago, IL.

Government pension plans were set up by people wearing rose colored glasses who did not take into account the inevitable maxing out of credit of the private sector, job transfers to overseas countrys, people drawing back their spending as they watch their neigbors losing their jobs and the faulty investment policys of those managing the pension funds. They can hardly ask the government to tax the people who had private pension plans or no plan at all. That would obviously be double jeopardy for the private citizen and would just result in a further depressed economy.

We absolutely need a pension bail out and only the federal government can step up with the perfect solution. Here is how. Immediately tax all excessive public pensions (you pick a number) with a federal excise tax. Find out whatever jurisdiction is responsible for funding such outrageous pension and grant the money back to current officials. Empower them to spend this money in any way they want. Presto. Bypass the local and state politico/employee sweetheart deals. Allow them to pass whatever they want in pensions then take it back. Only the feds have the power to collect such an excise tax. This would result in perfect symmetry. Tax those who receive the benefit. The good people of Bell have provided a case study of why this is absolutely essential. Tax the rich!

If you do not want to bailout public pensions WHY ARE "WE [public mployees & retirees] bailing out PRIVATE pensions with our tax dollars ??

The public pensions in Ohio ARE REQUIRED BY STATE LAW to be funded on a 30 year actuaral basis! That is why my contribution went from 8.5% in 2006 to 10% in 2008. Are the ELLECTED OFFICIALS in other states AFRAID to address the pension underfunding?? If they are then why do not "WE" send them to congress!!

What would be the effect if SOCIAL INSECURITY was subjected to a similar federal law? Of course this assumes that Congress would have the %^&*) to raise the rates for "social insecurity benefits". As long as I am ragging on social insecurity, I will also ask when congress END THE OFFSET DISCRIMINATION against publis retirees & their spouces [in effect since the early 1980's ??

There will be a terrible uproar in this country if we have to bail out the states. First of all, these people receiving a hugh retirement check should be required to take a cut. Why should taxpayers pay somebody else's retirement.

I was forced to join a union as a flight attendant for 35 years. It was a scam. One union leader destroyed our airline. They forced a strike that a handful of members wanted. The union leaders had the remote control of the votes in their greedy hands. They only cared about their power and bringing down the airline and they did succeed with EAstern Airlines. 30,000 families lost everything. There were suicides. Thank you, Leader Charlie of the union that brought it down. Kick out the corrupt unions and give everyone a miminum pension. If we do not do that, it will collapse the entire country. We will lose it all. Wake up, Americans. Let's save our country and do the right thing.

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